Why Are Amazon Investors So Thrilled?
Amazon (NASDAQ:AMZN) headed into its fourth-quarter earnings report with the stock price trading near an all-time closing high of $283.99. Analysts were holding estimates for earnings of 27 cents per share, a giant leap from the 60-cents-per-share loss the company posted last quarter. Yet, despite these positive indicators, several watchers were worried about the Internet retailer’s earnings power, and some of those fears were materialized in the final results.
For the three-month period ended in December, Amazon reported that earnings fell by 45 percent. The company generated a fourth-quarter profit of $97 million, or 21 cents a share, on revenue of $21.27 billion. During the same quarter last year, the Internet retailer had earned $177 million, or 38 cents a share, on $17.43 billion in sales. The bottom-line results missed expectations.
“We’re now seeing the transition we’ve been expecting,” chief executive officer Jeff Bezos said in a statement accompanying the earnings report. “After 5 years, eBooks is a multi-billion dollar category for us and growing fast – up approximately 70 percent over last year. In contrast, our physical book sales experienced the lowest December growth rate in our 17 years as a book seller, up just 5 percent. We’re excited and very grateful to our customers for their response to Kindle and our ever expanding ecosystem and selection.”
While earnings missed expectations, revenue certainly did not. Sales pushed that figure up 22 percent, and shares jumped 11 percent in after-hours trading as a result, temporarily hitting an all-time high of $288. With the operating income up 56 percent to $405 million, an increase from $260 million in the fourth quarter of 2011, the Internet retailer may be showing signs of the transformation Bezos alluded to. “The fourth-quarter operating income was up more than expected,” Morningstar analyst R.J. Hottovy told Reuters. “This supports the bull case that Amazon can monetize its growth over the longer term.”
But there is also the bear case: The results may not be a transformation that Amazon has experienced, but the first sign of a problem. Ahead of the Tape columnist Spencer Jakab told The Wall Street Journal on Tuesday morning that the company’s margins, which keep narrowing, are half of what they were in 2009. With such razor-thin margins, Amazon has trouble earning money, the publication noted.
The disparity between earnings and revenue point to a particular problem with the way Amazon does business. The Internet retailer significantly discounts some of its products, the Kindle in particular, to remain competitive, and this practice eats away at its margins.
Meanwhile, Amazon’s retail business buys products at wholesale prices and sells them to consumers online, often for less than what the item could be bought at a brick-and-mortar store. However, it also has several high-margin businesses, including cloud computing and digital content. These are the business that boosted the company’s fourth-quarter results, these are the business that are growing faster than its original retail operations, and these are the business that have its investors excited.
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